Building yourself a better business model

different tracks
Is it time to change tracks?

Last Wednesday, at the CIBC Presents Entrepreneurship 101 lecture, we talked about the importance of business models at the early stage of company development and how you need to continuously refine your model to achieve sustainable growth and success in a competitive marketplace.  Hopefully through the presentation you learned that having a cool product or service without a well thought-out business model rarely equates to having a great business.

In discussions I had after the presentation, two common themes emerged:

  1. How to expand your customer base through channel partnerships
  2. How to build a sustainable business model if you want to offer your product for free to a select customer type.

When you’re first starting a business, you’re often faced with the challenge of growing and expanding your customer base.  If things are going well, you might have preliminary sales to suggest that you have some sort of compelling product or service offering, but you quickly realize that your existing model won’t scale to where you want it to be at a cost structure you can afford.

So now what?

Well, one of the topics we discussed was finding a strategic distribution partner to complement your existing channel strategy.  Look at your competitors and suppliers, look at their products and offerings… is there something you have that would be of value to them or to their customers?  How valuable is it to your short term versus your long term goals?  Partnering can be a great way to get some much needed market traction and generate referrals for future business.

Another common topic of discussion was how to manage loss-leaders and freemium models. Typically, a loss leader is used as a means to either grow market share, drive adoption or sales of other higher margin products/services. While this is certainly a common approach, it always has to be balanced with the financial sustainability of the model. As we saw with, offering free shipping on low margin products sold below cost is not sustainable without an additional revenue sources to compensate for the loss.

In freemium models, the balance between free and paid service needs to be proportioned carefully. The cost of giving away the product or service must be low enough that it does not impact the profitability of the company. For instance, with digital goods, the cost of giving away additional content is negligible. Having the minority of your customers subsidize the majority is acceptable in this instance, as long as the premium user can see sufficient value in upgrading to the paid service. Some great examples on different freemium models can be found here.

When it comes to accounting for the social impact of a good or service, if the end-customer cannot afford the product or service, search for a stakeholder that would directly benefit from that end-customer receiving the offering (caregiver, community organization, funding agency, government). The payer need not necessarily be the end-user in your business model.

By thoroughly investigating opportunities within the model, you’ll be able to create a framework that will drive sustainable growth and evolve with the success of your venture.

Can you think of creative revenue models that could be applied to other markets? Does the evolution of Youtube to a profit sharing model with content developers make it a more sustainable model? Post here and continue the discussion.

Downloads and Resources

Weren’t able to attend the class? Need some notes or want to look something up? Click below for all of the goodies from the lecture. Watch the video and the slide presentation below.

CIBC presents Entrepreneurship 101 2009/10 – Week 6 – Building a Business Model from MaRS Discovery District on Vimeo.
Building a Business Model 
View more documents from Cathy Bogaart.